If California’s finances seem to rise and fall like its world-famous surf, we’re approaching a swell in the Golden State.
Standard & Poor’s has upgraded the state’s bond rating and Moody’s issued a positive commentary on its finances. After a projected budget gap approaching $40 billion in 2009, California is now forecast to return to a period of structural balance.
California’s budget improvement is impressive. As recently as 2008, the state’s budget contained $101 billion of general fund revenues. A year later, the Great Recession saw actual revenues fall by 18% to $83 billion, ushering in years of massive deficits. Utilizing one-time revenue measures, delayed payments, short-term borrowings and other unsustainable actions, California eked by.
Rising revenues and a surplus
Now, as a result of the economic upturn and the passage of Proposition 30 in 2012, which temporarily raises income and sales taxes, revenues are forecast to hit $98 billion in 2014, following an estimated $95 billion in 2013. The State Department of Finance projects small surpluses through 2017, its normal five-year forecasting period.
As a result, Standard & Poor’s recently upgraded the state’s GO debt to “A” from “A-.” “ The upgrade of $73.1 billion of general obligations was also accompanied by a “Stable Outlook.” Also upgraded was $9.3 billion of state-appropriation backed debt, which was raised from “BBB+” to “A-.” Moody’s rates the state’s GOs “A1,” and Fitch “A-.” Their outlooks are stable as well.
California has always paid its debt, and priority for debt payments is assigned in the state constitution, just behind education aid. Historically, California has experienced wild disparities in its financial performance due to a progressive tax structure based on sales and personal income taxes that rise and fall with economic cycles. Too often, the state’s bond ratings have followed suit. California’s general obligations were rated “AAA” as recently as 1991, and were downgraded to “BBB” in 2003. Now, the rating is on the upswing.
While the upturn in California’s financial fortunes are praiseworthy, future surpluses will be needed to address budget cuts and other “one shot” items employed to keep the state’s financial house in order during recent years. Nevertheless, California appears to be on the way back to financial stability and this can only be good news for the state’s bondholders.